Wednesday, May 23, 2018

Turkey raises late lending rate 300 bps to curb inflation

      After weeks of speculation and pressure on the lira's exchange rate, Turkey's central bank raised its its late liquidity lending rate by 300 basis points to 16.50 percent and said it would use all available instruments in pursuit of price stability and continue to maintain a tight policy stance until there is a "significant improvement" in the outlook for inflation.
      The Central Bank of the Republic of Turkey (CBRT) said after an extraordinary meeting of its monetary policy committee that elevated levels of inflation and inflation expectations continue to pose a risk and it had "decided to implement a strong monetary tightening to support price stability."
      The rate hikes comes after top government economic officials on Monday met to discuss measures, including moves by the central bank, to address the pressure on the lira and accelerating inflation amid growing investor discomfort with President Tayyip Erdogan's determination to exercise control over monetary policy after June 24 elections and thus erode central bank independence.
       In response to the sharp rate hike, the lira jumped 6.6 percent to 4.56 to the U.S. dollar from a record low of 4.86. However, the lira is still almost 17 percent below its rate at the start of 2018.
      It is the central bank's second hike of its late liquidity lending rate this year and the rate has now been raised by 375 basis points this year and by 650 points since the start of 2017. 
       The previous increase of the rate on the bank's late liquidity window - used by banks to access funds shortly before local markets' close - came on April 25 when the rate was raised by 75 basis points.
      Keeping some of its power dry, the central bank left its benchmark one-week repurchase rate steady at 8.0 percent along with its other policy rates.
      While the repo rate has been kept steady November 2016, the CBRT has been tightening its policy stance by other means, including the late liquidity lending rate, the rate it pays on local lenders' U.S dollar reserves and required reserve ratios, and raising volume of foreign exchange deposits to boost the value of the lira and slow down inflation.
       On April 30 the central bank said it was moving closer to using a single interest rate as a policy rate, something analysts have long hoped for as the current system with multiple rates has made monetary policy less predictable and transparent,.
      Turkey's headline inflation rate rose to 10.85 percent in April from 10.23 percent in March while core inflation rose to 12.2 percent.
       Last month the central bank raised its 2018 inflation forecast to 8.4 percent from 7.9 percent but retained its 2019 forecast of 6.5 percent and its medium-term outlook for inflation of 5 percent.
       The CBRT's monetary policy committee had been scheduled to meet on June 7.


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